See the Wikipedia entry for a description of how it works. http://en.wikipedia.org/wiki/Current_transformer

The idea is that you'll get a current in the secondary that is (ideally) proportional to the primary current (i.e., that flowing through the center). You can convert this current to a voltage using a suitably-sized resistor. The center-tap construction of the current transformer lends itself to using two diodes to convert the resulting AC voltage to DC, filtered with a capacitor and sampled with the Arduino's ADC.

You'll probably want to get one of them and experiment with it. It is likely that the transfer curve (current to DC voltage) will be non-linear due to various magnetic losses. However, you can probably construct a piecewise linear approximation to the transfer curve that will work suitably well for your application.

I want to do the same thing using this transformer and I have a question regarding the output to the arduino. Since it is a transformer its outputs will be AC and the arduino wants a DC input. Do I only have to setup a full bridge rectifier with a couple big capacitors to rectify and smooth it all or is there something I am not aware of?

"Do I only have to setup a full bridge rectifier with a couple big capacitors to rectify and smooth it all or is there something I am not aware of?"

Basically yes, however don't forget that first a resistor has to be wired across the secondary winding as shown in your data sheet. This provides a load for the transfomer (very important! safety item) and it's value sets the range of how much AC secondary voltage equals how many primary amps are flowing.

Also keep in mind that the bridge rectifier / filter capacitor will charge to the peak value of the AC voltage not it's RMS valve. You want to make sure that full scale filtered DC voltage is 5VDC max to the AVR analog input pin. It would probably be safer to add a series resistor between the analog input pin and the rectifer/filter output in case the measurement value ever 'spikes' above 5vdc as seen by the AVR chip.

Lova - That part looks really interesting, where did you get it from? How much does it cost? As I am not good with hardware I have just been reading the AC data quickly into an array and processing the curve data afterwords in the arduino.

Martini: This is not a cheap part since it is a 16$ at digikey. Depending of your application you may want to look at more possiblities at digikey. I want to use the 16$ one because it has high amp capability and the split core allows an easy installation on a machine in service.

Retrolefty: Essentially what I should do is like the schematic below but with a load resistor before the bridge?

"Retrolefty: Essentially what I should do is like the schematic below but with a load resistor before the bridge?"

Yes that is correct. However I would use two resistors, the first across the secondary of the tranformer that is sized for the correct (and safe measurement range you require) and a second one as you show on the output of the filter caps. Keep in mind that you will need to size the caps and final output resistor for the sample speed and signal response time that you need. If the caps and resistor are too large your measurement voltage will lag as it will act like a large low pass filter. It's an R/C time constant calculation and it all depends on how fast you want to be able to measure a change in current in the primary circuit.